Sugary drinks should be subject to a new tax, which could add 20p a litre to their price, with the proceeds going towards child health, a report says.

The report by food and farming charity Sustain said that the Government could raise £1 billion a year from a sugary drinks duty to pay for free school meals and measures to encourage children to eat fruit and vegetables.

The levy would also help save lives by cutting consumption of sugar-laden drinks, said the report, which has been backed by more than 60 organisations including the Academy of Medical Royal Colleges, Friends of the Earth, the National Heart Forum and the Royal Society for Public Health. Diet-related illness is now costing the NHS £6 billion every year, said the report.

Sustain urged Chancellor George Osborne to introduce a sugary drinks duty in his March 20 Budget and to channel most of the cash raised into a Children's Future Fund for programmes to improve children's health and future well-being.

The group's campaigns manager Charlie Powell said: "Sugar-laden drinks are mini-health timebombs, contributing to dental diseases, obesity and a host of life-threatening illnesses which cost the NHS billions each year. We are delighted that so many organisations want to challenge the Government to show it has a public health backbone by including a sugary drinks duty in Budget 2013. It's a simple and easy-to-understand measure which will help save lives by reducing sugar in our diets and raising much-needed money to protect children's health."

Sustain chairman Mike Rayner, of Oxford University's Department of Public Health, added: "Just as we use fiscal measures to discourage drinking and smoking and help prevent people from dying early, there is now lots of evidence that the same approach would work for food. This modest proposal goes some way towards making the price of food reflect its true costs to society."

The director general of the British Soft Drinks Association, Gavin Partington, said: "Obesity is a serious and complex problem, but a tax on soft drinks, which contribute just 2% of the total calories in the average diet, will not help address it. Over the last 10 years, the consumption of soft drinks containing added sugar has fallen by 9% while the incidence of obesity has increased by 15%.

"We all recognise our industry has a role to play in the fight against obesity, which is why soft drinks companies have already taken action to ensure they are playing their part. Sixty-one per cent of soft drinks now contain no added sugar and we have seen soft drinks companies lead the way in committing to further, voluntary action as part of the Government's Responsibility Deal Calorie Reduction Pledge. These commitments include, for example, reducing the sugar content in their products and introducing smaller packs. At present, 10p out of every 60p can of drink already goes to the Government thanks to VAT. Putting up taxes even further will put pressure on people's purses at a time when they can ill afford it. It's worth noting that Denmark recently scrapped such a tax."

A Department of Health spokesman said: "Our primary responsibility is to help the nation to be healthier. We keep all international evidence under review. But we believe the voluntary action we have put in place is delivering results."

Health Secretary Jeremy Hunt said he would not rule out legislation but said it was a "very blunt tool". Speaking to the Agenda on ITV1, he said: "I'm sceptical of legislation... in the end this is a matter of individual choice. It's a matter of people making decisions about their own lives but I don't rule it out and there are things that we're doing." Pressed about the likelihood of legislation, he added: "It's a possibility. I just think that it's a very blunt tool because in the end you can say we want to have certain children's cereal have less sugar content and people will find another something that calls itself a cereal that has more sugar content in it. Much more important is things like the way that supermarkets present fresh fruit, and do they have offers on fresh fruit and fresh produce as they do on sugary products."